Loans to Avoid in Canada

Loans to Avoid in Canada

Written by Mark Gregorski
Fact-checked by Caitlin Wood
Last Updated November 30, 2021

There might come a time when you find yourself out of money – but need money fast. Many different types of scenarios can result in an immediate need to replenish your bank account: medical procedures not covered by your insurance, significant repairs on your vehicle, a down payment for the purchase of an expensive item, bills payments you’ve fallen behind on due to a job loss, etc.

When it comes to obtaining a loan, there are numerous options at your disposal. You can approach a wide variety of different financial institutions, all of which offer various credit cards, lines of credit, cash advances, term loans, and home equity loans.

Even though more loans are available to consumers today than ever before, not all of them are created equal.

There are many non-traditional credit products designed to appeal to individuals who experience financial hardship. The lenders that offer these loan products entice consumers with promises of easy access to cash, with no need for exceptional credit ratings or proof of a steady income stream. While it may be straightforward to get these loans, paying them can cost you a lot.

What Kind Of Loans Should You Avoid in Canada

Alternative options to traditional lending products offer easy and convenient access to cash to those suffering from poor credit histories and cash flow problems. However, the high-interest rates, fees, and penalties that accompany these loans can result in financial hardship if you’re not careful.

Here are some loans products you should steer clear of:

Cash Advance

A cash advance is a service provided by credit cards that allow cardholders to withdraw cash from a bank or ATM. The process to obtain a cash advance is very straightforward. There’s no need to go through a lengthy approval process, and you can borrow up to your credit limit.

The downside with a cash advance is the steep transaction fees, as well as the high-interest rates you’ll have to pay. The interest compounds daily, from the day you receive the cash until you pay it off in full.

Payday loans

A payday loan is a short-term loan that is offered with exceedingly high fees and interest rates. These loans are meant to cover a brief cash shortfall, with repayment to be made once you receive your next paycheque.

To obtain a payday loan, the lender will require you to fill out a form to allow them to withdraw the loan amount directly from your bank account when it becomes due. The lender will expect you to prove that you have a regular income stream, a bank account, and a permanent address. You can borrow up to $1,500, which the lender will provide to you in cash or deposit it into your bank account.

Payday loans are one of the most expensive loan products. They can quickly get you in financial trouble if you rely on them too liberally. The total interest you could end up paying can easily eclipse the sum you initially borrowed. It’s not uncommon for interest rates to climb as high as 500% or more. Also, payday loans that show up in your credit history can be viewed as red flags by future lenders.

Check out these steps on how to break the payday loan cycle and get out of debt. 

Home Equity Loans and HELOCs

A home equity loan is a loan that you can borrow against the equity in your home. For example, if your home’s value is $300,000 and your mortgage amount is $200,000, you might be able to get approved for a credit limit of that amount or close to it.

A home equity line of credit, or HELOC, is a revolving line of credit backed by the equity in your home. As with a home equity loan, you can usually borrow up to the amount of equity you have built up in your home or close to it.

While the interest rates on home equity loans and HELOCs are considerably lower than those on credit card advances, payday loans, and unsecured lines of credit, they do come with their own pitfalls.

The biggest downside of a home equity loan is your home acts as the collateral for the loan. So if you cannot make payments and default on the loan, the financial institution that extended the loan to you can legally take possession of your home and put it in foreclosure. 

HELOCs pose some of the same problems that home equity loans have, namely that your home is used as collateral for the amount you borrow. HELOCs also have variable interest rates, which can increase your interest payments should rates rise. In addition, the application process for securing a HELOC is tedious and it requires that you pass the financial stress test imposed by federal mortgage rules. 

High-Interest Term Loans

High-interest term loans are loans with no collateral requirement. Some are short-term in nature and are to be repaid within a year, sometimes within weeks. In contrast, others can remain outstanding over several years. Most are easy to obtain, only requiring you to show proof of employment, a bank account, and a form of ID. You usually receive cash within a few days.

However, since you’re not putting up collateral and don’t need a stellar credit report, these loans charge a high-interest rate, often in the high double-digits. You may also incur hefty fees and penalties. 

It’s easy to underestimate the amount of interest that can accrue on these loans. In some cases, the total amount of interest you’ll end up paying will exceed that of the loan. For this reason, you should avoid terms loans that don’t require collateral. They will lock you in with an interest rate that will inevitably result in you making massive payments.

High-Interest Lines of Credit

Much like high-interest term loans, an unsecured line of credit will allow you to borrow money, but at a very high-interest rate. An unsecured line of credit is a flexible solution for when you need to access cash as you can decide when to schedule payments and use it only when needed. A wide variety of financial institutions offer them, and little paperwork is required to get approval for one.

The major drawback of an unsecured line of credit is that it can be costly. A high level of interest can accumulate quickly over a short period of time, making it difficult to stay consistent with your payments. Also, because a line of credit offers flexible payment options, you may be tempted to overspend, resulting in you having to be responsible for even larger payments in the future.

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The Cost of Using High-Interest Credit Products

There are three main drawbacks to using high-interest credit products:

  • Easy to get but hard to repay – It’s relatively easy to gain access to cash. No complicated forms need to be filled out and you can be approved for a considerable amount very quickly. On the flipside, repaying the amount owed can become unmanageable over time. Severe debt problems can ensue.
  • Big risk due to collateral – Most high-interest loan products don’t require you to put up collateral for security. While this can seem like a positive, the downside is that you’ll be on the hook for interest payments that can quickly add up to more than the value of your assets.
  • Expensive fees and interest – High-interest loans come with high fees and rates that are far greater than those on credit cards and secured lines of credit. While the rate in your loan agreement may not seem excessive at first, the danger becomes apparent when compounding takes effect, as shown below:
High-Interest Term LoanLow-Interest Term Loan
Loan Amount$5,000$5,000
Term3 Years3 Years
Total Paid$9,101.64$5,712.44
Interest paid$4,101.64$712.44

*Assuming a monthly compounding frequency and payment being made every 2 weeks.

How to Avoid Relying On Dangerous Credit Products

  • Have an emergency fund – An emergency fund is cash that is set aside specifically for unanticipated expenses. Having an emergency fund can provide you with immediate access to cash so that you don’t have to rely on expensive and burdensome loan products.
  • Use a loan comparison website – To get financing for a loan with reasonable terms and a competitive rate, avail yourself of the many loan comparison websites available. A simple application will grant you access to many lenders and a wide variety of loan options to suit your needs. You can be approved and funded relatively quickly.
  • Only use them as a last resort – You should almost always avoid loan products that have strict terms, severe penalties, high administrative fees, and excessive interest rates. If you must utilize these products, be prudent and only do so to cover periodic cash shortfalls and only when you’re confident you can pay them back quickly. Never rely on them as your primary means to access credit.

Bottom Line

As you can see, there are many different options for you to choose from if you find yourself in dire need of cash. There are more lenders now than ever before, and with many having an online presence, you can easily secure financing for the loan you need quickly and effortlessly. But before you do, ensure you do your research, so you can avoid the ones that may have debt collectors calling you soon.

Loan Glossary

Accrued Interest

Interest that is earned by an individual, but not yet received. Or, interest that is owed, but not yet paid. Interest is typically earned or payable after a certain period of time, such as a month or a year, which is why it can accrue.

Annual Percentage Rate (APR)

The interest rate you pay over a full year in exchange for borrowing. An APR is expressed annually but is typically charged monthly. You can determine the total monthly interest you’ll pay on debt by multiplying the borrowed amount by the APR and then dividing by 12.


Anything that has financial value is considered an asset. In order to reap the benefits of an asset, you must also own it as an individual or business. When it comes to debt, usually only real estate, jewellry, vehicles, and investments are considered assets.


An individual or entity that takes something (for example money or equipment) with the intention of returning it to the original owner. When the borrower it taking out a loan, there is usually an agreement involved and applicable interest.

Cash Advance

A cash withdrawal from a credit card. Cash advances are a very expensive form of financing as the interest rate on the borrowed amount is higher and there is often a flat fee. In addition, interest becomes effective immediately after you withdraw the cash, instead of after the balance due date.


An individual who shares an obligation of something that was borrowed with one or more people. All co-borrowers listed on an agreement are fully responsible for repaying the obligation.


Any asset that is used to secure debt. In the event that the borrower defaults on the loan, the lender has the right to seize the asset and sell it to cover the owed amount. Collateral is also commonly referred to as security.


An individual who agrees to make your loan payments and otherwise be responsible for your debt in the event that you default on the loan. Using a cosigner is a popular option for individuals who have trouble securing debt on their own.

Cost of Borrowing

All of the costs a borrower incurs when borrowing an asset or money. Examples of borrowing costs include legal fees, interest, loan origination fees and penalties.


An individual or entity that owes a sum of money to a creditor.


Failure to pay the minimum payment on a loan or account on or before the agreed-upon payment date. Delinquency is typically categorized in 30, 60, 90 or 120 days since lenders typically have monthly payment cycles. Delinquent accounts may eventually turn into defaulted accounts.


An individual who relies on another individual for financial support. Usually, this refers to a family member, common-law partner or spouse who is unable to financially support themselves.


The market value of an asset you own less the amount still owed (including any additional fees to sell or repay debts) on the loan used to purchase the asset if any. Equity increases when you pay down the debt as well as when the value of the asset increases. Equity can be calculated at any point in time and is also referred to as lendable value or net value.


A payment schedule that breaks up an owed amount of money into several equal amounts, otherwise known as installments, which are paid over an agreed period of time.


An amount of money that is borrowed by one entity from another with the expectation that the amount will be paid back. Interest is typically applied on the owed amount.

Loan-to-Value Ratio (LTV)

The ratio of what amount was borrowed to purchase an asset in relation to the market value of that asset. The formula would be: the total amount borrowed for the purchase divided by the total selling price of the asset. The borrowed amount can differ from the selling price if the individual makes a down payment, for example. In general, the lower the LTV, the more favourable the terms of the financing will be.

Payday Loans

A short term, small loan that a borrower promises to repay on their next pay day. Payday loans are known to be an expensive and risky form of financing that makes it challenging for the borrower to repay and manage.

Payment Period

The period of time over which a borrower is obligated to make a payment. Payment periods could be weekly, bi-weekly or monthly, sometimes even longer.

Prime Rate

The prime rate advertised by a lender is typically based on the Bank of Canada’s interest rate that is set each night, which may change at any time.

Principal Balance

The total remaining balance of a loan, without considering interest and other fees.

Secured Loan

A loan that is secured by an asset known as collateral or security. In the event that the borrower defaults on the loan, the lender has the right to seize the asset securing the loan and sell it to repay the owed amount. This type of loan bears less risk for the lender, but more risk for the borrower.

Unsecured Loan

A loan that is not secured by an asset known as collateral or security. In the event that the borrower defaults on the loan, the lender will not have the opportunity to seize the collateral or security to repay the owed amount. This type of loan bears more risk for the lender, but less risk for the borrower.

Rating of 5/5 based on 4 votes.

Mark is a writer who specializes in writing content for companies in the financial services industry. He has written articles about personal finance, mortgages, and real estate and is passionate about educating people on how to make smart financial decisions. Mark graduated from the Northern Alberta Institute of Technology with a degree in finance and has more than ten years' experience as an accountant. Outside of writing, he enjoys playing poker, going to the gym, composing music, and learning about digital marketing.

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